SHOULD YOU INVEST IN NEW OR OLDER PROPERTIES?
For investors looking to buy real estate, there are two options; buying new or established. While there’s plenty of new stock available across the country, some fear the quality may not be up to scratch, but there are other factors to consider too.
For the majority of investors, the established property is a far better option than investing in a new development. This is because capital growth potential is greater with established.
Those buying a home to live in can be forgiven for being dazzled by shiny new properties, but in the real estate game, new is a bit of a no-no if you’re looking for the ideal investment. The only exception is if an investor can afford to be a developer. If you can build a new project at cost, and most of us can’t unless we’re a builder, then building could be the right choice for you.
When you’re buying a brand-new property, you don’t just pay for the actual property, you are also handing over a stack of cash straight to the developer.
This is because to make a profit, the developer builds not only their margins into the price but also their marketing costs. Therefore, you end up paying a premium. By buying well, either at or below the property’s intrinsic value in the established market, investors can pay below replacement cost and make a capital gain almost instantly. When buying established, buyers can negotiate a great deal and pay a fair price, as well as enjoying immediate capital growth in most instances.
Also, buying an established property that needs some TLC can mean paying substantially less than it might be worth if you have the ability to look past the cosmetic flaws and see the potential.
Often you will have less competition for tired or messy properties because most people just see too much hard work. Investors can then value-add with smart renovations and cosmetic upgrades, something that’s hard to do in a new development, where everything is done.
It’s possible to turn a $50,000 refurbishment into an extra $70,000-plus in capital gains and increase rental yield at the same time. That’s something that is simply not possible to achieve with a new property. The location also plays a big role. If a new property is in a relatively immature area, like a housing estate, it’s harder to research potential value.
With this type of property, you have less historical data at your disposal to make an informed decision when it comes to pricing and less comparable property sales.
In a slowing market, established property holds its value better than new too. The established property will generally outperform the averages over the long term and achieve excellent capital appreciation, without taking too savage a beating during lulls in the market.
Older properties allowing for a cosmetic makeover can improve the value, rentability, rental return, and depreciation of an older property – something that can’t be done with a new property. A well-done renovation can make an older property as attractive as a new one, but with more growth potential.
Well-selected older properties are also more likely to be able to be subdivided for increased wealth. Let’s say you keep the original home and build two more on the subdivided portion. That leaves you owning three properties while only forking out once for the costs associated with buying and you keep the developer’s margin in your pocket, not theirs.
Secondly, older properties tend to hold more value in the land than in the bricks and mortar. Given that, generally, when it comes to property, the land grows in value while buildings drop, older properties are a smarter choice. Those that can still contribute income towards your mortgage are ideal so buy a good, solid older home that doesn’t call for too much maintenance in the best area you can afford. It’s a recipe for reasonable rental returns and maximum growth. The golden rule is: 70% of your money into the land and no more than 30 percent into the bricks and mortar.
Even when taking higher rental rates and depreciation allowances of newer properties into account, the potential extra capital growth of an older property wins out.
Of course, holding older properties can burn a hole in your pocket but if you build a new home behind your older house, you are balancing your cash flow with the old and new.
New properties tend to attract investors who lead busy lives, want to keep the process easy, stress free and low risk, there are many benefits to only buying new properties.
This investor can still have a diverse portfolio with all new properties. They can diversify in location and property type to achieve this.
New properties may be cash flow positive with the extra help of the taxman as well as the tenant. So when buying new properties because the tenant and the taxman are paying for my properties. New properties attract higher tax claims due to having higher depreciation allowances.
In areas of strong capital growth driven by demand, a shortage of accommodation can occur. This makes new properties in higher demand from families moving to the area, or companies looking for accommodation for their workers. There is never a problem with renting, as new properties get snapped up first, usually for higher rent. New properties attract premium tenants willing to pay premium rent.
New properties also allow an investor to easily anticipate their holding costs, as there are no unexpected maintenance issues like with older properties. Everything is under builders or appliance warranty for many years. This can make a huge difference to your cash flow.
There’s also that appeal to modern tenants (who can be very demanding), as everything is new, shiny and working and full of lifestyle features. More light, more windows, balconies or alfresco area, larger bedrooms, ensuites, multiple living areas all give you greater tenant appeal and rent.
By buying a house and land package (i.e. having a new house built fully ready for a tenant), there are substantial savings as you only pay stamp duty on the land component, often saving over $10,000 -$15,000 on full stamp duty if it was a completed older home . This gives investors a great head start into the market.
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